Minimum Wage and The Laws

Minimum Wage and The Laws

A June 14 Telegraph-Journal editorial (“Minimum Wage, Maximum Gain”) argued that all manner of economic benefits – a higher standard of living, reduced dependence on welfare, and a “boost” to the economy with subsequent increased tax revenues that could pay for more public services – would flow to New Brunswick by hiking the minimum wage rate from the $7.25 per hour that will go into effect on July 1 to $12 per hour.

In contemplating such changes to minimum wage statutes, legislators should pay close attention to two other laws: the law of demand and the law of unintended consequences.

The law of demand (a.k.a. common sense) states that as the price of something goes up, less of it will be demanded. If the price of maple syrup increases, for example, less maple syrup will be bought. Raise the price of gasoline and we will fill up our tanks less frequently.

Similarly, if the price of labour (the wage rate) goes up… you guessed it, less labour will be purchased. Other names for “less labour being purchased” are higher unemployment, fewer shifts and less income for workers with jobs, and aborted plans for business expansion that would have created new jobs.

A 2005 study by Michele Campolieti and Morley Gunderson of the University of Toronto and Chris Riddell at Queen’s University finds that “[m]inimum wage increases in Canada have led to substantial adverse employment effects.” They estimate that a 10 per cent increase in minimum wage levels – and note that a $12 per hour minimum wage would be an increase of almost 70 per cent! – results in a three per cent drop in employment.

Earlier this year the Ontario government considered changes to its minimum wage and Finance Minister Greg Sorbara commissioned a study by Professor Gunderson on the effect of an immediate increase from $8 per hour to $10 per hour, an increase of “only” 25 per cent. As reported in the Toronto Star on March 21, Professor Gunderson “found such a dramatic rise in the wage could cost even more jobs than the 66,000 the finance ministry had estimated.”

In fact, Professor Gunderson’s research suggested that the loss could be between 90,000 and 180,000 jobs.

This brings us to the part on unintended consequences.

Most advocates of a higher minimum wage probably do mean well. But as we know, the road paved with good intentions ends up in a rather undesirable neighbourhood. The important thing to note here is that those beating the minimum wage drum generally will not be the ones to suffer the unintended consequences of their actions. No, the unlucky parties will be the student trying to save money for post-secondary education, the spouse of the family’s main breadwinner working part-time for some extra money to help with household expenses, and the unskilled worker transitioning from welfare and hoping to gain job experience that will lead to a brighter future.

The fact is that a minority of minimum wage recipients are full-time workers. Rather, a typical profile is a teenager or young adult who lives at home with Mom and Dad and works part-time.

Like me, you may recall working part-time for minimum wage in a pizza restaurant, a grocery store, or a gas station when you were younger. You also may share my suspicion that if the government of the day had increased the minimum wage by 70 per cent, that job would have vanished faster than a 12-inch deep-dish with the works on a Friday night. So too would the opportunity to learn the skills and discipline of being an employee and the chance to feel the pride and satisfaction of earning your own money and paying your own way, either to the movies on Saturday or to college or university in the fall.

For those full-time employees who do work for low wages, wouldn’t it make much more sense to keep these people working rather than price them out of the job market while feeling smug satisfaction about how we “stood up for the little guy?”

A far better public policy is to top-up low incomes with a working income tax benefit. This approach avoids the job-destroying effect of raising the price of labour and also places the burden of assisting those who need help where it belongs, on the general treasury, rather than on the owners of the local diner or corner store.

During a debate earlier this year on re-instating a federal minimum wage, one Member of Parliament was quoted dismissing the notion that a minimum wage increase would harm the economy. “I don’t think they get it,” she said.

I’m sure that there is some law of irony that I could cite here as well, but it escapes me for the moment – just as an appreciation of causes and effects seems to escape the Honourable Member.

Ian Munro is the Director of Research with the Atlantic Institute for Market Studies, an independent, non-partisan public policy think tank in Halifax, N.S.